In 2002, then-Rep. Mike Oxley (R) of Ohio (far left) and then-Sen. Paul Sarbanes (D) of Maryland (2nd left) joined President Bush at the signing of a corporate responsibility act. The Supreme Court Monday ruled that part of that law violated the separation of powers clause of the Constitution.

In a narrow ruling, the majority justices said the accounting oversight board could continue to function as before, but that its members must face removal at any time by the Securities and Exchange Commission (SEC), which supervises the accounting board.

Under the law as written by Congress, the accounting board members could only be removed for cause – in other words, if they engaged in some form of wrongdoing. Under Monday’s ruling, the members must be able to be removed “at will,” or for any reason including a policy difference.

The action was deemed by the majority justices as necessary to restore enough control over the board by the president to satisfy separation of powers requirements.

“We hold that such multilevel protection from removal is contrary to Article II’s vesting of the executive power in the president,” Chief Justice John Roberts wrote for majority. “The president cannot ‘take care that the laws be faithfully executed’ if he cannot oversee the faithfulness of the officers who execute them.”

At issue in the case

The oversight board was established in the wake of the accounting scandals at Enron and other large corporations. It was designed to encourage aggressive audits of publicly traded companies to help keep corporate officials honest and investors better informed of a firm’s financial health.

To create a watchdog group independent of the accounting industry, Congress required the five members of the oversight board to be appointed by the SEC. In addition, the SEC was to supervise the board’s activities and wield the power to remove any PCAOB board member, but only “for cause.”

At issue in the case, Free Enterprise Fund v. Public Company Accounting Oversight Board, was whether appointment of oversight board members by the SEC rather than the president violated the separation of powers and the Constitution’s appointments clause by insulating the board from presidential control and political accountability.

The high court ruled that it did.

“The Constitution that makes the president accountable to the people for executing the laws also gives him the power to do so. That power includes, as a general matter, the authority to remove those who assist him in carrying out his duties,” the chief justice wrote. “Without such power, the president could not be held fully accountable for discharging his own responsibilities; the buck would stop somewhere else.”

In a dissent, Justice Stephen Breyer said the statute did not significantly interfere with the president’s executive authority. “It violates no separation-of-powers principle. And the court’s contrary holding threatens to disrupt severely the fair and efficient administration of the laws.”

The facts of the case

The case stems from an investigation undertaken by the PCAOB against Nevada accounting firm Beckstead and Watts. An inspection by the accounting board uncovered significant deficiencies in eight of 16 audits reviewed.

Beckstead responded by filing a lawsuit challenging the constitutionality of the board’s authorizing statute – a portion of the Sarbanes-Oxley Act. The non-profit Free Enterprise Fund joined the suit challenging the statute.

A federal judge and a federal appeals court panel upheld the law.

The appeals court ruled that the PCAOB did not violate the Constitution’s appointments clause because they were “inferior officers” within the executive branch whose work is controlled by SEC commissioners, who are appointed by the president.

Likewise, the appeals court said the law did not violate the separation of powers because the SEC exerts control over the board and, in turn, the president exerts control over SEC commissioners.

On Monday, the high court ruled that two levels removed from the president was one level too much. “While we have sustained in certain cases limits on the president’s removal power, the act before us imposes a new type of restriction – two levels of protection from removal for those who nonetheless exercise significant executive power,” Roberts wrote. “Congress cannot limit the president’s authority in this way.”

Reaction to the decision

In a joint statement, the authors of the Sarbanes-Oxley Act – Paul Sarbanes and Michael Oxley – said the high court action would allow accounting board’s essential protections of American investors to continue.

“The decision from the Supreme Court adjusts the law in a way that allows the PCAOB to continue to ensure the integrity of public company audits,” Sarbanes and Oxley said.

“The decision effectively fixes the constitutionality of the PCAOB by making board members subject to ‘at will’ removal by the SEC and therefore the president,” he said, adding that it permits the continued function of both the accounting board and the underlying statute.

Cindy Fornelli, executive director of the Center for Audit Quality, said she was pleased that the decision would allow the accounting board to continue to operate without any legislative action.

“Evidence demonstrates that audit quality and investor confidence have improved since the board’s creation,” she said. “The decision will prevent any disruption to the key activities of the PCAOB.”